President Biden just announced that he is canceling $10,000 in student loan debt for all Americans earning $125,000 or less. This action is inflationary, costly and counter-productive. And what about current and future students who go into debt? Will $10,000 be waived for them too?
There are 45 million Americans with student loan debt. The total is just over $1.6 trillion. This means that the average debt, for indebted graduates, is around $37,000. A third of these graduates have debt of $10,000 or less, which means that all of their college debt would be forgiven. Proponents of this action say it is necessary because these people are suffering from the weight of this debt.
Proponents further argue that the debt burden is holding these Americans back from moving forward with their lives. They argue that debt prevents people from buying a new home or even prevents them from getting married and having children.
A recent CNBC survey noted that 81% of people with student loan debt said they delayed one or more key life milestones because of their debt.
“Student loan debt prevents family formation, it prevents people from making decisions about their lives, from buying a house, from buying their first car, from getting married, from having children”, says Nicole Smith, chief economist at the Georgetown University Center on Education and the Workforce. “And that was not the purpose of student debt. Student loan debt was meant to be good debt — the kind you incur so you can invest in building your human capital so you can live your life afterwards — and it turned into something much more insidious. .
That’s a lot of poppycock.
The average interest rate on student loans is 5.8%. A debt of $10,000 paid off over 10 years at an interest rate of 5.8% would result in a monthly payment of $110 per month. If the loan is repaid over 20 years, the payment drops to $70 per month.
For a student debtor with an average balance of $37,000 and repaying over 10 years, the monthly payment would be $407. Since most repay over 20 years, the payment would be $261 per month. All of these monthly payments are much lower than a monthly payment for a new car.
For someone with a gross annual income of $125,000, the monthly net salary after taxes would be around $8,300. This amount can easily afford a monthly payment of $407 on a student loan.
The program is also very expensive. Penn Wharton’s budget model estimated “that canceling federal college student debt will cost between $334 billion over the 10-year budget window. About 70% of debt relief goes to borrowers in the top 60% of the income distribution.
This program is also inflationary. Almost all of the runaway inflation we are experiencing today is the result of excess demand stemming from the nearly $7 trillion in deficit government spending in fiscal years 2020, 2021, and 2022. Excess demand is also the result of outrageously irresponsible monetary policy in 2021. and the first half of 2022, when the Fed dramatically increased the money supply and kept interest rates near zero, despite soaring inflation.
This student loan forgiveness program will add billions to excess demand, simply because the money that would have been spent repaying loans will now be spent buying more goods and services, increasing demand and putting pressure on the rise in prices.
And what about the future?
Today, college students will say they should also have $10,000 of their student loans forgiven. And high school kids will say they’re about to borrow big money to go to college. Shouldn’t we write off $10,000 of their future debt?
Is it fair for non-university graduates and for university graduates who have already repaid their loans?
People who skipped college and learned a trade or other skill don’t want their tax money used to pay someone else’s college loans. And graduates who have paid off their loans want $10,000 back.
Allowing responsible people to borrow money from the federal government so they can go to college is arguably a good idea and will provide an opportunity for any qualified high school graduate. But borrowing money means it has to be repaid. Canceling student debt sets a bad example for young adults who are borrowing money for the first time.
Michael Busler is a public policy analyst and professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written opinion pieces for major newspapers for over 35 years.
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